Time is money, and when it comes to collecting past-due invoices, more time means less money.
In fact, according to the Commercial Law League of America, at 90 days past due, 75 percent of invoices are paid; at 120 days, that number drops to about 50 percent. It goes without saying that cash is king for businesses, especially small and medium-sized ones (SMBs); and that the sooner that sum hits your bank account, the sooner it can start collecting interest or be put back into the business (think “time value of money”). To collect the most money as quickly as possible, ensure your accounting procedures are designed to maximize the likelihood of a client paying on time and that you have effective processes for addressing overdue accounts.
“Generally speaking, many SMBs put far more time and effort into the sales process than they do into the collections process. Closing sales is exhilarating, while collecting accounts receivable is as dull as watching paint dry,” says Manny Skevofilax, business financial advisor at Portal CFO Consulting. He stresses that a deal isn’t complete “until the cash clears the bank account” and recommends businesses put as much emphasis on the collections process as they do on sales. Be preemptive, and use techniques that increase your odds of receiving on-time payment.
Incentivize
Offer customers an early payment discount, advises Skevofilax. “For example, if your normal terms are 30 days, then you could offer a client a 2 percent discount if they pay you within 10 days of receiving the invoice. You make the decision on the discount and days based on what you can afford.”
Invoice smarter
To further speed up payment, alter the way you invoice. Instead of performing your project or service and then waiting another 30 days or more to get paid, consider asking for a 50 percent deposit up front, followed by a 30 percent payment upon substantial completion of the project, with the final 20 percent payment due upon total completion. “If you are in the service business, request that your invoices be prepaid on the first day of each month,” he suggests. “You will find that many of your customers are open to these arrangements because they understand the importance of timely accounts receivable collection for their business.”
Involve the sales team
Inevitably, some of your clients won’t pay on time. Make sure you have a designated person, team, or company in charge of collections, and that collections communicates with sales. Jean Cook, business coach and certified facilitator at Corporate Performance Group and The Alternative Board has over 30 years of corporate finance experience and notes that the collections/sales relationship is “often non-existent or underutilized at many SMBs.”
Cook suggests sending a regular report to the sales team listing notable past due accounts. They don’t need to see every account that’s overdue; prioritize. “Typically, the definition of what should be on the report is based on the amount past due, the percentage of the account past due, and days past due. For example, anything that is more than 45 days past due and is greater than $2,500 or 25 percent of the customer’s balance may be included on the report.”
Additionally, hold a monthly call or meeting for the collections and sales teams in which you discuss the status of past due accounts and agree upon an action plan, suggests Cook. Be sure to look for recurring themes. If customers aren’t paying because promises aren’t being met, you have a bigger issue on your hands.
It’s important your sales team knows when a client will be hearing from collections, and which clients they may want to follow up with directly. “Your company makes a good impression when the right hand knows what the left hand is doing,” she notes. “Plus, if the customer hears about it twice, they are more likely to investigate and pay.”
